Mervyn's Blames Former Owners for Bankruptcy

New York City Mervyn's Holdings LLC has sued its former private-equity owners, saying the firms stripped out real estate then leased it back to Mervyn's at higher rates, pushing it into bankruptcy, according to a Reuters report.

Mervyn's was purchased in 2004 by a group of investors including Cerberus Capital Management and Sun Capital Partners. The deal forced Mervyn's to transfer nearly all of its real estate assets to a newly formed entity.

As a result, Mervyn's had to pay rents for locations that, before the deal, it had either owned or leased at rates that were often below market rates, the report said, citing documents filed at the bankruptcy court in Delaware.

"By separating Mervyn's real-estate assets from its retail operations, the private-equity players made sure that any residual value or upside in the real estate assets were reserved for themselves and not for Mervyn's," according to the documents. "The 2004 transaction is a transaction that ultimately led to Mervyn's bankruptcy and is a fraudulent transfer that cannot withstand scrutiny."

When Mervyn's filed for bankruptcy in July, it had 177 stores in seven states, employed about 18,000 people and had annual revenue of about $2.5 billion. The company has so far announced plans to close 26 stores and cut about 1,700 workers as part of a restructuring plan.